Inner city's inner strengths mined

Michael OnealTribune staff reporter

Poverty often hides in plain sight. That much we learned when Hurricane Katrina slammed into New Orleans and focused national attention on that city's economically downtrodden African-American community. But the data don't lie. While it often seems we are surrounded by McMansions and Hummers, poverty in this country has grown for four years running. Recent statistics show that many of the worst-hit cities have been here in the industrial heartland. This is troubling for Chicago, because so much of the local economy is tied to the region's health. What to do?

In the previous two Sunday editions, the Tribune examined how persistent job loss has devastated Detroit, how isolationism has done much the same with Rockford and how those cities have struggled, with varying degrees of success, to respond.

Milwaukee is exploring something different. The nation's erstwhile beer capital has become a laboratory for a contrarian idea that is quickly gaining currency in economic development circles. The idea is this: Depressed inner-city communities have a lot more economic potential than initially meets the eye. Like deep-value stocks, they are held down by perception that exaggerates reality. What they require is imagination and a healthy injection of capital.

Call it opportunity hiding in plain sight.

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When Wal-Mart called him in 1999, it was an education for Robert Schmidt.

The retail giant had its eye on one of Milwaukee's most decrepit shopping malls and wanted Schmidt's real estate company to redevelop it with Wal-Mart as the anchor tenant.

To the average Milwaukean, the nearly vacant Capitol Court Shopping Center had become a symbol of urban blight. It sat like a wart near one of Milwaukee's most poverty-stricken inner-city neighborhoods and was a magnet for teens looking to hang out and make trouble.

But in faraway Bentonville, Ark., the data spoke unemotionally. What Wal-Mart saw was that 222,000 people lived within three miles of Capitol Court, and they had a median household income of $38,000. The richest of Milwaukee's mostly white suburbs had per capita income almost twice that high. But they couldn't touch the inner city in terms of concentrated spending power.

"The mall had tainted people's perception of the surrounding neighborhood and that just wasn't fair," said Maureen Goetz, development coordinator for Schmidt's company, Boulder Venture.

"People were pretty skeptical at the front end," Schmidt said.

For Milwaukee, overcoming skepticism about its blighted inner city is becoming its last, best hope of arresting an economic slide that has been going on for decades.

Ever since proud, old manufacturers like Schlitz Brewing and Allis-Chalmers began to wither in the 1970s and 80s, an exodus of high-paying jobs has hollowed out the community, shrinking the middle class and creating a yawning gap between rich and poor.

"Laverne and Shirley don't live here anymore," declares Mayor Tom Barrett, referring to the staunchly middle class 1970s-era sitcom characters. Gone are the days when "anyone with a strong back and a good alarm clock" could support a family in Milwaukee's inner core, he said.

While the city gets raves for Summerfest, its spectacular new art museum and the bustling redevelopment of its historic Third Ward area, a recent series in the Milwaukee Journal Sentinel documented a more disturbing trend. Once one of the very best places in America for a black family to earn a living, Milwaukee is now one of the worst. Census data show that the city's poverty rate ranks among the highest in the country, especially among its children.

Astoundingly, almost 60 percent of the city's black males over age 16 lack a full-time job.

To civic leaders like local attorney James Connelly, this is evidence that Milwaukee is slowly "dying of congestive heart failure." But he and others also see a rich opportunity to implement a redevelopment strategy based on free-market incentives, not the usual government handouts.

What they're counting on is just the sort of calculus Wal-Mart used at Capitol Court--a new recognition among marketers, retailers and big money investors that in an aging economy with mature markets, the inner cities are increasingly where the action is.

The buzzword in financial circles is "EDM" or "Emerging Domestic Market." What it means is that the inner cities are both underserved as consumer markets and underutilized as sources of eager workers and energetic entrepreneurs.

"The inner city has been left behind, but there's a fundamental demographic shift going on in this country," said Kevin Jordan, managing director of a Goldman Sachs fund that has invested more than $150 million nationally in minority-owned companies and inner city real estate. With minority urban populations growing much faster than suburbs rife with white Baby Boomers, he said, "you'd better make sure you're on top of that."

Four-pronged approach

To take advantage of its own "emerging market," Milwaukee has launched a series of initiatives designed to capitalize on the assets unique to its inner core: high population density, an underutilized workforce, proximity to distribution channels and valuable urban real estate.

The efforts fall into four broad categories: attracting new investment, supporting minority business owners with investment capital and expertise, creating tax-advantaged investment districts, and working with employers and unions to train inner-city workers for specific job opportunities.

"At one end of the chain we're trying to lift people out of poverty and at the other we're trying to create significant minority wealth," said Milwaukee attorney Cory Nettles, who grew up in the inner city and served as the state's secretary of commerce for two years.

What's important, said Betsy Zeidman, director of the Milken Institute's Center for Emerging Domestic Markets, is linking sources of capital with inner-city populations.

"In terms of access to capital there's a huge gap between EDMs and the rest of the economy," Zeidman said. "That gap is what explains low growth."

Predictably, given the creeping pace of economic change, Milwaukee's efforts have so far produced only the bare outline of a solution for to its inner city crisis. Business people and politicians are focused on the problem, but the wheels are turning slowly. Whether these efforts can revive the economic vitality that existed in Milwaukee when the breweries were humming and the tractors were coming off the line is very much an open question. Cities are littered with once-promising economic development schemes.

But Milwaukee is taking one step at a time.

Retraining efforts have been successful in steering inner-city residents to construction and health-care jobs. And city boosters have been "tilling and watering" in other areas, Nettle said.

Authorities have created a tax increment financing district for the city's historic Bronzeville area. They have formed a venture capital fund aimed at financing minority entrepreneurs. They have convinced local businesses and banks to contribute to a collateral pool that minority businesses can tap into as they seek to appease skeptical lenders. And they have linked established companies with minority-owned firms in the same businesses so they can share ideas and expertise.

Most recently, an economic development group called the Greater Milwaukee Committee has been trying to turn a major business trend to Milwaukee's advantage. As companies increasingly focus on what management gurus call their "core competencies," they are shedding ancillary business units.

President Julia Taylor said the organization is using its connections to the city's business leaders to identify potential spin-offs based in Milwaukee. Several companies, she said, are working through the committee to see how those units might be spun off to new owners committed to staying in the inner city She wouldn't identify the companies.

The goal in all of this is creating and highlighting economic opportunity, not giving disadvantaged neighborhoods handouts. Social aid is important, but according to Harvard Business School professor Michael Porter it isn't enough to save a neighborhood.

Porter runs a national group called the Initiative for a Competitive Inner City, which has provided market research and consulting services to Milwaukee and other cities looking to spur redevelopment. His message is simple: Inner cities are not monolithic. Despite the ravages of crime, drugs and poverty, most low-income neighborhoods also produce thousands of energetic working people with adequate money to spend.

In Milwaukee's case, the inner city has the largest pool of available labor in a region with a declining population base. The demographics skew younger than in the suburbs and the educational levels are higher than people often think. According to the 2000 Census, 68 percent of inner-city adults in Milwaukee graduated from high school, while 38 percent have a college degree.

These metrics still trail more affluent neighborhoods. And inner-city Milwaukee does have major social problems: weak public schools, a large number of single-parent families and a culture of underachievement to name a few. But in a speech launching an effort called the Initiative for a Competitive Milwaukee two years ago, Porter pointed out that the best way to solve those problems is to capitalize on the economic advantages inner-city neighborhoods have in abundance.

"If all we tried to do was ameliorate the social issues and social needs of these communities, ultimately we'd always be playing catch up," he said. "We also [need] an economic strategy ... not based on hope and charity, but on the marketplace."

A tough sell for some

Sitting at a conference table in his sleek office in downtown Milwaukee, Schmidt said that he hadn't given Capitol Court Shopping Center a second thought before Wal-Mart called to talk about it. But as he looked at the neighborhood's numbers, the development scheme made plenty of sense. Residents within 3 miles of the mall were spending almost $1 billion on life's essentials each year, yet they had to drive or take the bus 7 miles to the nearest full-service shopping mall.

"There was a high degree of risk, but we became confident that we could earn a higher profit from it," Schmidt said.

Boulder eventually bought Capitol Court for the rock-bottom price of $8 million and renamed it Midtown Center. In contrast to the suburbs, where residents usually line up to protest a new mall, the city welcomed Boulder with open arms.

The problem was, financiers didn't.

"Local banks and investors didn't want to get involved," Schmidt said. "I guess they couldn't get over the perception that the mall was a problem."

Boulder got help with infrastructure from tax breaks and eventually found debt financing from Key Bank in Chicago. For equity financing it turned to the Canyon Johnson Urban Funds, a California group affiliated with basketball star Earvin "Magic" Johnson, which is devoted to investing in minority neighborhoods.

With a lot of hard selling, Boulder eventually attracted a host of blue-chip retailers, from Lowe's Home Improvement to Firstar Bank. Yuppie icon Starbucks even jumped on board, prompting then-Milwaukee mayor John Norquist to publicly tease the Seattle company for "finally figuring out that black people drink coffee, too."

In the end, Midtown was a home run. Boulder and Canyon sold the mall in February for $53 million to an affiliate of Oak Brook-based Inland Real Estate Group of Cos. It also collected $5.2 million for smaller parcels.

Schmidt is the first to admit that the retail jobs created at Midtown Center don't replace the high-wage manufacturing jobs that have been lost over the years. But economic development experts say the mall helps stabilize the neighborhood and creates opportunity for minorities. The International House of Pancakes near the center, for instance, is minority owned, as are several of the stores in the mall. Concordia University Wisconsin rents space on the second floor for an adult education program catering largely to African Americans.

As Norquist points out, true minority ownership in a neighborhood has to evolve organically. Attorney Connelly, a partner in Milwaukee's Foley & Lardner, agrees. This effort will be built one business at a time, he said.

Connelly is convinced that the inner city doesn't necessarily need massive employers to replace the companies that have left. What's important is volume--hundreds of smaller companies that can add up to significant employment.

"We've recognized the value in not becoming too dependent on one specific revenue base," Connelly said.

What's clear is that even small companies can make huge impacts on inner-city lives. Consider the case of Medovations, which has been producing precision medical products in an ancient plant on Milwaukee's East Keefe Avenue since the 1980s.

On the outside, Medovations looks like a fortress. Ever since a stray bullet flew through one of the windows and lodged in an engineer's wall, the windows have been covered by prison-grade steel. A razor wire fence surrounds the property, keeping at bay the neighborhood's nighttime drug dealing and prostitution activity.

On the inside, however, the building has been transformed. Museum posters featuring the art of abstract painter Joan Miro adorn an office area filled with sleek, post-modern cubicles. Nearby is a controlled environment "clean room" where workers in smocks, hats and rubber gloves machine extruded plastic into products such as heart surgery catheters.

Performance reaps rewards

The plant's production supervisor is 47-year-old Lavonna Davis, who until six years ago was one of nine siblings working behind bulletproof glass in his family's nearby grocery store. Given that he was a convicted felon, he was happy just to have a job. But he didn't think an erratic stream of earnings split nine ways posed a very bright future for his family. Besides, he said, the neighborhood around the store could be treacherous.

"You had to wait until the coast was clear to run out at night with the money bag," he said.

Davis found Medovations, which is part of a family owned company based in suburban Germantown, through a temp agency. He thrived in the company's three-month do-or-die training program and eventually worked his way to the top production job. It didn't matter that he was an ex-con or that he didn't have a lot of experience. All Medovations cared about was performance.

"I got an opportunity to get as far as I could," Davis said. "That's real."

Margaret Vierling, the plant's hard-driving, 37-year-old manager, said Medovations is committed to helping people like Davis. But if hiring local people didn't pay off, the company wouldn't do it, she said.

Medovations finds one long-term hire for every four it puts through the training program--an enormous expense. But once it finds a good employee, he or she tends to stay for a long time, reducing turnover costs. The average tenure at the company is 9.5 years.

At the moment, the firm's impact on the neighborhood is small; it has just 32 employees. Production workers earn $8 an hour to start, which is hardly a windfall. But the rate ratchets up to $9.25 in the first year and there are regular performance-based increases after that.

The good news is that Medovations is bursting at the seams from strong demand and a spate of new products. It is planning to add new production space and begin a new round of hiring.

Vierling said she could expand on 5 acres the company owns in Germantown. But she is trying to convince the city to sell her an empty lot next to the downtown plant so she can build new production space there. The problem with the suburbs, she said, is that the labor pool is too small. And people don't work as hard.

Davis explains it this way: "To work here you have to take pride in what you're doing. And our people do that because they're trying to prove so much. They've got a lot going against them."

"When someone doesn't show up for an interview, I always know why," she said.

She admits to feeling pressure to outsource work to Mexico or China. Customers demand lower prices and higher quality every day. But she also said that those countries can't match her company's skill in precision plastic extrusion. And Medovations isn't interested in making low-margin commodity products; it spends heavily to develop new processes to improve efficiencies and new products to diversify sales.

"Everybody in business is out to make money," Vierling said. "We make it work down here."

Nettles, who serves as the company's attorney, said the only problem with Medovations is that there aren't many more companies like it hiring and training workers. Convincing more of them to think differently about the city's toughest neighborhoods while creating an environment for minority entrepreneurs to thrive may be one of the biggest challenge this city has ever faced.